Mid-year FY19 – Auto & Auto Ancillaries Outlook

Ind-Ra-New Delhi-31 August 2018:India Ratings and Research (Ind-Ra) has maintained a stable outlook for the auto sector for the remainder of FY19. This is in line with Ind-Ra’s earlier expectations of moderate sales volume growth in the passenger vehicle (PV) segment, double-digit growth in the commercial vehicle (CV) segment and steady growth in the two-wheeler segment (2W) on a year-on-year basis.

While the growth momentum in CVs is likely to continue, thanks to improved economic activity, increased infrastructure development and improved mining activities, the growth rate is likely to moderate in 2HFY19 due to a higher base. Amid several regulatory changes undergoing in the industry, CV growth would remain susceptible to clarity regarding the new axle load norms and vehicle scrappage policy.

Demand for 2Ws and PVs would continue to be driven by the increasing disposable income. In 2W, the growth rate in motorcycles is likely to outpace the growth rate in scooters, primarily due to a favourable monsoon as well as an increase in rural income.

The upward trend in interest rate (up by cumulative 50bp) and fuel prices would increase the cost of ownership for end-consumers and hence, curtail the PV demand to a certain extent, especially in the entry-level segment, where consumers are price-sensitive.Even the smaller CV fleet operators are likely to be affected, as the increase in freight rate is unlikely to be commensurate with the increase diesel prices, thus impacting their profitability and demand for additional fleet.

The capacity expansion, technological advancements and regulatory changes are likely to keep R&D and capex on a higher side, thus moderating the credit metrics of both auto and auto-ancillary players. These coupled with higher raw material prices are also likely to make a vehicle costlier; however, price hikes by OEMs would be limited, given intensified competition. This is likely to moderate the margins for OEMs. Limited pricing power of ancillaries, their ability to pass on the absolute price hike only with a lag, and higher cost of imported raw materials amid a depreciating rupee are also likely to moderate the margins for ancillaries. However, financial flexibility and lower leverage are likely to keep credit profiles resilient. Ind-Ra also expects technological tie-ups and inorganic expansion among ancillaries to persist.